When you’re shopping for a mortgage, you’re faced with many decisions. Fixed or variable? Which lender should I go with? Should I choose a one year fixed mortgage or five year mortgage? Another decision we face is whether to sign up for mortgage life insurance. Although the banks would tell you mortgage life insurance is a must (you must even sign a waiver form if you decide to pass), it’s helpful to understand what it is before making your final decision. Let’s take a closer look at what mortgage life insurance is and whether it makes sense to sign up.
What is Mortgage Life Insurance?
Mortgage life insurance is similar to term life insurance. If you were to die, become ill, or were involved in a serious accident, your mortgage would be paid off (typically up to a maximum, such as $500,000). Depending on your policy, you may also be covered for five years of accrued interest and any amount owing in property taxes to your local municipality. Signing up for mortgage life insurance is easy-peasy. You don’t even have to take a medical exam. Similar to home insurance, you’ll pay premiums, which are conveniently paid with your regular mortgage payments.
Limitations in Coverage
While mortgage insurance may sound great on paper, it has its limitations. Remember what I mentioned earlier? You’re covered without having a medical exam. Mortgage life insurance offers peace of mind in case your spouse or you were to suddenly pass away. Your mortgage would be taken care of, no questions asked – well, not quite. While you may believe you’re protected by mortgage life insurance, that’s not often the case.
When signing up, you must disclose any medical conditions you have. If you fail to mention one (even if it’s by mistake) and ever file a claim, it could be denied. Your loved ones may only receive your premiums with interest back instead of the death benefit – ouch! How do the banks do this? It’s because of something called “post-claims underwriting.” To save time on a medical exam, the banks forgo it. It’s not until after you pass away that they take a closer look to see if there’s a reason you may not be covered. It can be devastating for families dealing with the loss of a loved one who were expecting their mortgage to be taken care of.
Level Premiums at a Cost
One of the so-called benefits of mortgage life insurance is that your premiums stay the same over the life of your mortgage. Even when you renew your mortgage, your premiums stay the same. While that may sound like a good deal, you’re actually paying the same premiums for less coverage over time. For example, let’s say you have a $300,000 mortgage when you start out, but manage to pay off $100,000 in five years, leaving you with a mortgage of only $200,000. Your premiums are the same, yet you’re only covered for $200,000 (instead of your original $300,000). This sounds like a good deal – for the bank. Furthermore, if you were to renew your mortgage at a different institution, your mortgage life insurance would have to start all over again. Although the amount of mortgage insurance applied for would be less (since theoretically as you should have paid off a certain amount of your mortgage during your previous term, unless you took out equity), the premiums would be more because you’re older.
Consider Term Life Insurance
Due to limitations of mortgage life insurance, term life insurance is the better choice for many families. Not only are the premiums similar to mortgage life insurance, it’s a lot more flexible. You can use term life insurance to pay off your mortgage, help pay for your children’s education or take time away from the workforce to recover. The death benefit stays the same regardless of how quickly you pay off your mortgage. You could even add a rider on some policies that would cover disability from work.
If you choose term life insurance, just make sure you sign up for it. You might say you will, but unless you actually sign on the dotted line you won’t be covered. If you have no coverage when buying your home, you’re probably better off signing up for mortgage life insurance in the meantime. You can always cancel it once you get term life insurance.
If you already have a mortgage and are not sure if your mortgage is covered should anything happen to you, we have a team of experts on hand to assist you in deciding which type of term insurance makes the most sense. Feel free to contact our office today.